When Retirees Should Consider Renting When They Downsize

Typically retiree homeowners sell and buy smaller. But for some, buying all over again makes no sense.

NEW YORK ( TheStreet) -- Older homeowners are often urged to consider "downsizing" -- selling the big family home and using the proceeds to buy a cheaper one and put some cash aside. But there's another downsize option that's rarely discussed: selling the old home and becoming a renter.

Clearly, this goes against the grain, as most people prefer owning to renting. But would the own-to-rent downsize ever make sense? It's worth some thought.

In a standard downsize, the long-term homeowner, typically someone in or near retirement, sells the big home in which the children were raised, then buys something that is cheaper, has lower taxes and utility costs and is easier to maintain. Ideally, the equity on the old home is more than enough for the homeowner to pay cash for the new one, and the difference goes into a rainy-day fund or investment.

But there are several circumstances that might make it pay to rent the new home rather than buy.

The rental, for example, requires less cash upfront than a cash purchase. Imagine you sold a $400,000 home owned free and clear and had a choice between buying a $200,000 condo or renting a comparable apartment for, say, $2,000 a month. You might get into the rental for advance rent and security deposit of $6,000. You'd keep $394,000 from the home sale (not including selling costs such as Realtor's commission), compared with $200,000 if you bought the condo.

This could be appealing if you had a special need for that extra cash, or if you saw a juicy investment opportunity. If you were willing to risk the stock market, the extra $200,000 might grow enough to offset some of what you'd pay in rent. Of course, that investment gain should be compared to any appreciation you might get on the condo if you bought it.